How Strong Relationships Lead to Successful M&A

Intro

Scott Kaeser runs corporate development at United American Security, a security agency. In this interview, we touched on a range of topics from how they handle hurdles that come up, post-closing surprises,  deal disasters, integration management, and the keys to running a successful process. 

Here's an intro on Scott's background

I ended up taking a role with Sterling Partners, a private equity group. I worked in their accelerator program, which was a program intended to link up and coming business leaders with CEOs of Sterling Partners portfolio companies.

The portfolio company I was working with was Livingston International, and my role there was to help them build a corporate development team and function where I helped them build the entire team as well as develop the strategy, the M&A and roll-up strategy for that particular company.

After two years there I joined the corporate development team of Wolters Kluwer, which is a Dutch based information services company, where I took a role as the Director in their corporate development group. After that, I started leading the corporate development function for one of LaSalle Capital's portfolio companies, which is United American Security, a security guard business.

Tell me a little bit more about the deals you're doing today. What do they look like? How long are they typically taking? 

The deals are pretty small and they range anywhere from a million dollars up to $20 million a purchase price. Thankfully, there's a lot of small companies out there that we're able to identify and work with either the seller or a broker and get a deal done.

The previous CEO has honed the process in the security guard space, so we know what we're looking for in due diligence and contracting. The process can be pretty straightforward from start to finish, and we could do a deal in two to three months. 

Now, what would you say is different between doing those smaller transactions versus some of the larger ones you worked at the previous role?

For smaller transactions you're working directly with the seller. Even if they have a broker or an advisor, a CPA and a lawyer you're still interacting with that seller and building a relationship with them in a much more intimate setting than you would in a large deal that has investment bankers on both sides.

It helps you understand what the value drivers are that help them win in their specific geography or with specific customers, so that we're able to replicate that once we take over the operations of the business and not losing customers or key employees under our ownership. 

Diligence is easier as well. The connections to key management are easier and even if there are various functional areas, sales, finance, operations, customer service, you're still only dealing with a few people that you need to gather information from, and that clearly streamlines and simplifies the process.

Let's talk a little bit more about diligence. What are some of the important things or the things you've really learned from your experience in these multiple roles that you had running acquisitions? 

Deal fatigue is real. If you're trying to enact an enormous diligence process on a small seller, who's trying to handle all the requests himself or with one advisor, you can put a good deal in jeopardy. There need to be the key questions that you need to get answered and sticking to that is crucial. 

A good corporate development professional will be able to take the list questions from each functional area, narrow it down, and make sure there aren't duplicates getting to the real core questions of what you need to know in order to validate your pre LOI evaluation model and assumptions.

You need to find the key drivers, major red flags and issues, and make sure you uncover those. If your purchase agreement is structured appropriately, you're going to have some protection there too. 

Is there anything else that may be helpful in terms of delivering a smooth diligence process?

It’s important to make sure that you're capturing conversations with the seller.  There's always data transfer, where you have information in a data room, or outside of the data room.

You may have third parties that you're engaging with to help you perform some diligence, whether it's QOE, legal or tax, so it’s important to make sure all of that information gets consolidated into one place. This matters so that you can always reference it, but also disseminate it to various team members, so they have access to learning and are up to date with questions and answers.

How much of your diligence process do you end up outsourcing?

For us, it depends on the size of the deal.  On small deals we won't outsource anything, so it's really incumbent on me and my team. We'll do a lien search, make sure we understand what liens have been filed, if any, against the target. For larger transactions, 10 million plus, the first stage would be to engage with financial advisors for a quality of earnings analysis, and hopefully get a layer of drivers below that, to make sure that if we're relying on real financial statements.

How would you go about determining what parts of diligence are you going to outsource versus keeping in-house?

It depends on the expertise we have in-house. We don't have internal counsel on things like legal or tax, so we are using external counsel for that type of work, whether it's just contracting or specific diligence on a lien, a lawsuit or a claim that we want to make sure we're protected against. We can always reach out to a tax advisor to make sure we have clarity on what our rights, obligations and risks are related to tax. 

Have you ever walked away from a deal? 

Of course. You may get a SIM and start the process, do a little diligence and realize it's not for you. In that case you're gonna walk away and not make an offer. The deals that are harder to walk away from are those where you have done 90% of work and are on your way to the finish line or even further.

At that point, if for instance a key customer leaves or something else comes up,  it can give you a reason to pause or you can try and renegotiate a purchase price with the seller, so you can still come to terms on something that's fair for both sides.

 Let's talk more about the deals you walked away from during diligence. What are other reasons that you've left the transaction?

There were very few instances of a fraud or just a purposeful lack of information provided to me as a buyer, which was then found out later. In one instance at Wolters Kluwer, at the very end of the process, we had the seller walk away on a deal we were doing in South America.

He walked away from the transaction literally at the signing table because he wanted to pursue a career in politics and decided that selling to a Dutch company didn’t go in his favor. 

I've had deals fall through at various stages. It’s tougher once you have an LOI signed where you go through diligence and you start finding things that just don't match up to what either was purported, pre diligence and pre LOI.

In those instances I've had deals just fizzle. You usually wait for the exclusivity period to expire and slowly start severing ties. If you have to walk away because you weren't able to justify assumptions, you made pre LOI, that's a tough thing for corporate development professionals to have to handle. 

In that case where the CEO changes the mind about selling the company  - is there a penalty or hit that he takes for doing that?

Our deals are very small, and in that particular case we did not have any breakup fees in the deal, but deals can be structured with breakup fees for either side. Typically, if a buyer walks away, then a seller is rewarded with some type of breakup fee.

What kind of post-closing surprises have you faced? 

Thankfully, nothing too massive. I know some deal professionals and executives who were in situations where diligence wasn't thorough enough. There were some real potholes found after diligence, after closing and integration, that materially impacted the business negatively.

For instance, if customers leave soon after the transaction you're stuck holding the bag on something like that. In the end, your diligence is only as good as the people that you have on your team and the various support you have doing the diligence. 

I've had some nice surprises on the positive side where just building the right team and bringing a seller on board within our organization has motivated them and provided them with the resources necessary to really knock it out of the park. By that, I mean winning some new customers, and growing the business a lot faster than expected, which is what we're all looking for.

Have you ever done a bad deal and had some lessons you've learned from it?

I've done at least one or two bad deals. We were buying a small company. There were eight people in the organization and we ran them through a diligence and contracting process that was insane. We spent tons of money, had 15 professionals from various functional areas on the buyer side, all guns ablazing at the seller who was totally overwhelmed.

We dragged out the process because we kept finding little things that, in the big picture, weren't a big deal, but we created a lot of deal fatigue. The seller, who was really paramount in the business, disappeared after the close and soon thereafter, the key staff and the company effectively fell apart. It wasn't a material impact on the buyer's side, but it was material from the fact that we invested in it and then the deal didn't go very well after closing. 

In that instance, my lesson learned was to really make sure you're balancing the size of the deal from a buyer's perspective, with the size of the seller and, and impact that that deal could have on the buyer. I’ve learned that how important it is to make sure that you just recognize when a simplified deal process is going to be sufficient, overwhelm a small seller.

What's your other story? 

We did a deal in the coal industry space, not that long ago. It was a very good price, and the price was reflective of the struggles of the coal industry, but you end up struggling to grow post-closing in that deal. Customers have all been retained, but there has been some reduction in service levels, and I had to write a one page brief on why this is still a good deal, even though it's in the coal industry.

Now I look back at that and say, anytime you have to write a brief, that is justifying a deal in sort of a negative headwind, maybe you should rethink that deal in the first place. It’s important to make sure that you appropriately evaluate the deal, given some of those factors in the industry, the geography, and return required. 

What are some things you've learned about running an integration process?

I’ve learned that it’s important to hire a good project manager. Having a good project manager allows me to step back, and make sure that some of the big ticket drivers and assumptions are being followed through on and carried out, be it cost reductions, an emphasis on new products or sales.

Integration is hard. You can do a great deal, get a great price and do it efficiently, but  the real work starts with merging two companies together. No matter how similar corporate development professionals claim the two companies are, there's always going to be either cultural differences, system differences or process differences that are requiring intelligent people to figure out the best way to combine them in a manner that's not overly burdensome on either organization. There are third-party consultants that do a lot of work on post-merger integration, and if you can afford that in your deal, that's a really wise thing to do. 

What are your thoughts about running an integration process? Are you trying to do as much as you can, as soon as you close it, spread it out over a period of time or do the later integration?

In terms of the role that I currently have in our industry, we're buying assets and there are some legal requirements, state requirements on some of these deals that would require us to do certain integration items immediately or within a week or two. But,  there are  some things that can take time, and this goes back to that integration project management and their ability to prioritize which items you're going to need to do right away and which items are material. 

Hopefully, that person should be able to evaluate which items, if left too long, could create a problem and tackle those right away. Additionally, having a good a hundred day plan that's specific enough to allow for evaluation of criticality is a good thing to do. 

Have you experienced an integration process that went terribly wrong? 

Other than the example I already gave, thankfully I haven't had that many experiences of bad integrations in my current role. In the security guard space, we don't have too much of a proliferation of vendors, so we're able to transfer those vendor relationships and processes over pretty fast. We have a streamlined billing payroll and scheduling software system that we migrate legacy customers and employees over to immediately as part of their hiring process customers. For us, integration is usually a pretty streamlined process. 

Let's step out for a little bit and say you were to go back and see yourself 10 years ago. What would be some of the key advice you'd give to yourself? 

I’ve found that, in my career, building a relationship with the seller has helped me be successful in the deals I've done. From my perspective, it's not exactly my money, but I treat it as if it is. The seller obviously has invested a lot in the cases of the deals I'm doing, it's their baby, so it matters to them who's buying their company, how you're buying their company and how you'll treat it and their employees or customers going forward.

It’s not all numbers, LOIs and purchase agreements, but it’s also interpersonal relationships that matter, as it helps not only get a deal to the finish line, but make it successful after that.

Do you have any tips for doing that in terms of building the relationship with sellers? 

Dinners, events and taking the relationship out of just the work environment or conference room helps people loosen up and creates a connection that transcends just the deal, the numbers and the integration planning. Spending time outside the standard deal process is a wise thing to do to help build relationships. 

Starting from a position of fairness goes a long way with sellers, advisors and brokers. This helps you build that relationship with the seller sooner than later, which helps them understand that this needs to be a good deal for both parties. When I have a seller that feels like they got a fair deal, then that person immediately becomes a reference for me for a new seller. 

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